Chapter 8 will discuss the effectiveness of the current pension system in Malaysia giving pension credit contributions to women who are unemployed due to care-taking responsibilities. Such women include those who exit the labour market early and do not return to work, as well as those with disruptions during employment. Care-taking responsibilities include taking care of their own children or elderly family members, such as their own parents and parents-in-law.
Under this scenario, there were three types of assumptions for a woman’s employment history: no disruption during employment, early exit or early retirement during employment, and 5 years and 10 years disruption during employment. The age of a woman at disruption or exit from the labour market, and the reasons for disruptions has been discussed earlier in this chapter (refer to Section 5.4).
Since Chapter 8 focuses mainly on the effectiveness of giving credit pension contribution by the Government, the assumptions are used to calculate the estimated monthly retirement income based on own contribution and contributions by the Government throughout the unemployed periods. I also calculate the amount an individual is expected to contribute every month in order to be out of poverty and also the percentage amount Government are expected to contribute based on individual’s monthly contribution during their unemployment period. The screen shots for the simulation model from the Excel spreadsheet can be referred in Appendix D (refer to Figure AD4 (a)-(d)).
126 5.7 Outcome Measures
The focus of this research is on the adequacy of the retirement income for elderly women at retirement, based on the current pension scheme in Malaysia. The objective of a pension system is to provide adequate retirement income to retirees during their old age. Therefore, based on the hypothetical simulation designed to evaluate the adequacy of the retirement income of women with disruptions during employment, the outputs were evaluated based on two measurements:
Poverty Rate and
Replacement Rate Level.
These two measurements are chosen based on previous researchers that have used poverty rate and replacement rate level to measure the adequacy of retirement income (Evans and Falkingham, 1997; Butrica and Uccello, 2004; Reno and Lavery, 2007). These measurements are discussed further below.
5.7.1 Poverty Rate
As discussed in Chapter 3, Section 3.7, the poverty rate is used to measure the economic well-being of an individual. Although the poverty rate differs for each country, it can be used to determine an individual’s standard of living based on their level of income. Inserra (1996) has stated that income is an appropriate indicator in measuring the poverty status. Previous studies in developed and developing countries have used the poverty rate in order to measure the adequacy of income during old age (Masud et al., 2008; Smeeding and Sandstrom, 2008).
Therefore, in this study, the poverty rate or the Poverty Line Income (PLI) used in this study as a living-standard indicator was RM691 per month (refer to Chapter 3, Section 3.7). The monthly annuity retirement income simulated in this study was used to measure the poverty
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level among women in Malaysia, in order to fulfil the aim of analysing the effectiveness of the current pension policy.
5.7.2 Replacement Rate Level (RR)
The replacement rate level is defined as the ratio of the worker’s initial retirement benefits to earnings in the year prior to retirement (Rejda, 1999). It can be used to measure the level of benefits and the degree of social protection offered by different welfare systems. It can also be used to measure the level of benefits, which in this study, is the retirement income and the adequacy of income after retirement and the impacts on retirement requirements (Palmer, 1989; Whiteford, 1995).
The International Labour Organisation (ILO) has set the standard replacement rate level at 40% of their last drawn salary in order to provide a sufficient income and maintain the standard of living after retirement (Samad and Kari, 2007). Results that show below the standard replacement rate level would indicate that the income after retirement is insufficient.
Although such a calculation does not give a consistent measure of adequacy, as it depends on the factors included in the calculation, it provides an overview of how much should be saved or earned by retirees in order to live comfortably after retirement.
Previous research has used the replacement rate level in order to compare the social security systems (Evans and Falkingham, 1997; Munnell and Soto, 2005; Mitchell and Phillips, 2006). The replacement rate level is generally used to compare two properties in the calculation: the salary or the post-loss income received after retirement with the income during employment or pre-loss income (Whiteford, 1995; Gramlich, 1996). The post–loss income received can be in the form of annuities (e.g. Pension Scheme) or lump sums (e.g.
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Employees Provident Fund) which have to be calculated to determine the monthly income (Munnell and Soto, 2005).
5.8 Chapter Summary
This chapter has discussed on the development of the hypothetical simulation model (MHYRISA) employed in this study. It first discuss on the research objectives and the development of the model which consists of three different stages: (1) disruptions; (2) flexible parameters; and (3) credit pension contribution. The assumptions used in this study were briefly explained, followed by a discussion on why the assumptions were chosen.
Finally, the most appropriate outcome measures used in this study were discussed. The next three chapters will present the study findings.
The next chapter (Chapter 6) will discuss the analysis on the impact of gaps and disruptions during working life on income in later life. A comparison will be made between the monthly income of full-time employed men and women.
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